Saudi Arabia’s state-controlled Aramco revealed on Tuesday, January 30, 2024, that it is pausing its plans to increase crude production capacity from 12 million to 13 million barrels per day. The decision, mandated by the Saudi Ministry of Energy, comes after years & significant investments were dedicated to reaching the 2027 target.
Despite being publicly listed in 2019, Aramco has not disclosed the rationale behind the ministry’s directive. The company has stated that it will provide updates on its capital spending guidance in March when announcing its full-year 2023 results.
At 7 a.m. London time, Brent crude prices for March delivery saw a 0.24% increase from the previous close, reaching $82.60 per barrel. Concurrently, WTI contracts for March delivery experienced a 0.35% rise, reaching $77.05 per barrel.
This announcement on Tuesday occurs against the backdrop of growing concerns about the global outlook for oil demand. The ongoing worldwide shift towards decarbonization is casting uncertainty over long-term investments in fossil fuel projects.
As per the International Energy Agency’s annual report published in December, global oil demand is anticipated to have grown by 2.3 million barrels per day in 2023, reaching a total of 101.7 million barrels per day.
However, the International Energy Agency (IEA) pointed out that this growth projection ‘masks the impact of a further weakening of the macroeconomic climate.
The IEA revised down global demand growth for the fourth quarter of 2023 by nearly 400 thousand barrels per day, with more than half of the decline attributed to Europe.
The deceleration is expected to persist into 2024, with global gains halving to 1.1 million barrels per day, reflecting below-trend GDP growth in major economies.
Within the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, Saudi Arabia has taken a leading stance advocating for a dual energy transition strategy. This strategy involves continued use of oil and gas until renewable resources can adequately meet global demand, aiming to prevent global shortages.
Critics argue that this approach may be seen as self-serving for fossil fuel producers, especially since Western sanctions, following Moscow’s invasion of Ukraine, have disrupted access to Russian seaborne crude and oil products, leading to substantial profits for these producers.
As the de-facto leader of OPEC, Riyadh consistently shapes the group’s policy, leveraging spare production capacity to influence prices. This influence was notably demonstrated during a dispute between OPEC+ heavyweights Saudi Arabia and Russia in spring 2020, triggering a brief price war as both nations increased output. They later reconciled to address the challenges posed by the Covid-19 pandemic.
Riyadh’s decision to halt further capacity increases, thereby limiting its ability to gain additional market share, comes at a time when the U.S. is achieving record-high crude production, despite President Joe Biden’s climate-focused policies.
Saudi Arabia stands at a pivotal juncture, with Riyadh aiming to diversify its economy away from heavy reliance on oil and gas revenues through the Vision 2030 program led by Saudi Crown Prince Mohammed bin Salman. This initiative focuses on 14 giga-projects, including the Neom industrial complex.